ADUs, Basement Apartments, and Garage Conversions: Can You Rent Part of Your Home?

Renting your entire home isn't the only option. For many homeowners, the more financially interesting path is renting part of their home — a finished basement, a garage conversion, a backyard cottage — while continuing to live in the main structure. This arrangement, often called house hacking, can generate meaningful rental income while preserving your primary residence status, your homeowner's insurance, and your Section 121 capital gains exclusion.

But renting a secondary unit comes with a set of rules that differ from renting the whole house. Here's what you need to know before you list a basement apartment or plan an ADU conversion.

The ADU boom

Accessory Dwelling Units — self-contained residential units on the same lot as the main home — have expanded dramatically over the past five years as states have moved to preempt local restrictions on their construction.

18 states now have broadly permissive ADU laws. California has led the charge: ADU permits grew from fewer than 1,300 statewide in 2016 to approximately 25,000 in 2022. Nearly 1 in 5 residential units produced in California is now an ADU.

Washington's HB 1337 (effective July 2025) requires cities in urban growth areas to allow up to 2 ADUs per lot by right — without discretionary review.

Massachusetts's Affordable Homes Act (August 2024) allows ADUs up to 900 square feet by right in single-family zones statewide.

Texas and Florida remain more restrictive at the state level, but many major cities have liberalized local ADU rules. Check your specific municipality.

ADU construction costs

If you're considering building an ADU (rather than converting existing space), plan for:

• Garage conversion to ADU: $95,000–$250,000 depending on market and scope
• Attached ADU addition: $150,000–$300,000
• Detached ADU (new construction): $200,000–$400,000+
• Prefabricated/modular ADU: $150,000–$350,000 for the unit; installation and permits additional

California's Housing Finance Agency offers grants up to $40,000 for ADU pre-development costs to income-qualifying homeowners. Several other states and cities have similar programs.

Income potential to offset costs: Los Angeles West Side ADUs generate $2,800–$4,200/month. Denver ADUs average $1,650/month. Seattle runs $1,500–$3,500/month depending on unit size. At these rents, a $200,000 ADU construction cost has a payback period of 5–8 years in high-rent markets.

Renting a basement apartment: what's required

A "basement apartment" that's livable informally is not the same as a legally rentable dwelling. Before renting a basement, verify:

Legal ceiling height: The International Residential Code requires a minimum 7-foot ceiling height in all habitable basement rooms. Rooms with structural beams or ducts may have partial 6'4" ceiling areas, but the majority of the room must clear 7 feet.

Egress windows: Every sleeping room in the basement must have an egress window — a window large enough for emergency escape. IRC minimum: 5.7 square feet of openable area, with a minimum width of 20 inches and a minimum height of 24 inches. The sill cannot be more than 44 inches above the floor. Bedrooms without proper egress windows are not legally usable as sleeping rooms.

Separate entrance (where required): Many municipalities require a separate exterior entrance for a rental unit. Others allow shared entrances with appropriate fire separation.

Fire separation: Most building codes require a minimum fire-rated separation between the main dwelling and the rental unit — typically 1-hour rated walls and floors, with properly rated doors.

Smoke and CO detectors: Required in every sleeping room, outside each sleeping area, and on every level including basements.

NYC specifically prohibits renting cellars — basement levels more than 50% below curb grade — in 1- and 2-family homes. Many other cities have similar restrictions.

The permit question: is your basement apartment legal?

Many basement apartments across the country exist without permits and have been rented informally for years. This creates real exposure for the landlord:

• Code enforcement complaints from neighbors can force the unit to be vacated
• Tenants may legally withhold rent for unpermitted units in some jurisdictions
• Insurance claims may be denied for damage to unpermitted spaces
• Selling the property with an unpermitted unit creates disclosure complications

The solution is to permit the unit. Contact your city's building department, review the requirements, and get an inspection. In many markets, getting a basement unit up to code and permitted costs $5,000–$20,000 in improvements and $500–$2,000 in permits and fees. That's a reasonable investment for a unit generating $1,000–$2,000/month in sustainable, legally protected rental income.

Impact on property value

Properties with permitted ADUs command a meaningful premium. FHFA data shows the median appraised value with an ADU at $1,064,000 versus $715,000 without — a roughly 49% difference, though some of that reflects the types of properties and markets where ADUs are built. More conservative estimates put the value-add at 20–35% of total property value.

Permitted ADUs also make the property significantly more financeable for future buyers, since lenders can count projected rental income when qualifying buyers.

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